As a long-time financial planner, I find it very important to make sure that a client’s portfolio is aligned with their overall financial plan. Many investment advisors or planners try to figure out a client’s portfolio allocation via a questionnaire. Although some questionnaires are good and some are bad, I feel that the best allocation can only be determined if it is coordinated with their overall financial planning goals and objectives. Many investors (and even financial advisors) use allocation targets to try and beat benchmarks like the S&P 500. However, how is beating a market a true goal in and of itself? Shouldn’t trying to have a higher probability of meeting or beating their financial goals and objectives be the true “benchmark” or goal of your or anyone’s portfolio?
At STA Wealth, instead of using questionnaires or return benchmarks to determine portfolio allocations for our clients, our planning team uses our financial planning process to help our investment team and clients determine each client’s:
- Target Rate of Return: This is the rate of return they would like to meet or beat over a market cycle that will make them feel good about their savings and investment discipline. Typically in a financial plan, we start off by trying to beat the inflation rate at least by 2% (but this is discussed and determined for each client).
- Hurdle Rate: I define their hurdle rate as the rate of return needed to help assure that they reach their financial/retirement goals without running out of money.
- Strategic Allocation: To help determine this, we stress test their financial, tax and cash flow projections with several “what-if” scenarios and a Monte Carlo Analysis.
STA Wealth’s financial planning process starts by assisting in determining your optimal strategic asset allocation model to help you reach your goals. A strategic asset allocation is more of a “buy and hold” (with rebalancing) strategy that has a historical target of helping you reach the three goals discussed above. These allocations typically use words like “Growth”, “Growth and Income” or “Balanced” and they set the overall asset allocation. The asset allocation is typically the allocation percentages between asset classes like stocks, bonds, cash, commodities, etc. A strategic asset allocation model may be best in my experience for the “buy and hold” investor…especially those that can either stick with their plan and/or have a long-time horizon before reaching retirement or their other financial planning goals. The test is whether you can “sleep at night” through steep market declines. If you want to be a buy and hold investor, it is important that you can stick with your plan regardless of the market cycle. That is why in fourth quarter of 2017, I wrote the article that discussed taking the time to “stress test” your portfolio to see if you could handle the volatility of your strategic asset allocation. As you can see in the image at the top of the article, many investors act on emotion versus making disciplined investment decisions.
In contrast to a strategic asset allocation, a tactical asset allocation is one that may use varying methodologies or portfolio management tools such as technical analysis to put a trading function that may either increase or reduce risk as the market and discipline dictates. At STA Wealth Management, we have a tactical overlay to reduce and/or re-introduce risk to our clients’ portfolios in an attempt to help reduce overall risk. We have a recorded webinar via this hyperlink that helps explain the STA Wealth Investment Process (including the tactical overlay and the other “pillars” we use in constructing and management portfolios for our clients). Our portfolio risk management discipline is helpful to our clients that have lower risk tolerances and/or are in retirement and may not be able to sleep at night if their portfolios fall sharply in the short-run without the ability to alleviate the pain. Part of the goal with our tactical strategy is to help clients stick with the investment discipline regardless of market cycle as they know we will do our best to try and miss the deeper market declines while having a discipline to re-enter the market as it improves.
In addition, for those of you that want to coordinate your investment plan with your overall retirement plan, I discuss this in detail in the Retirement Survival Guide.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Avidian Wealth Solutions), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Avidian Wealth Solutions. Please remember to contact Avidian Wealth Solutions, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Avidian Wealth Solutions is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Avidian Wealth Solutions’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.
Financial Planning and Investment Advice offered through STA Wealth Management (STA), a registered investment advisor. STA does not provide tax or legal advice and the information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice